India’s largest engineering and construction company, Larsen & Toubro Ltd., has forecast lower growth of 10-12% in order inflows this year citing an election year and an uneven recovery in private sector investment. Last year’s performance in order flows — 19% versus the company’s expectation of 12-15% — was due to a shift in government tender awards, Group Chief Financial Officer R. Shankar Raman said in an interview.
(Bloomberg) — India’s largest engineering and construction company, Larsen & Toubro Ltd., has forecast lower growth of 10-12% in order inflows this year citing an election year and an uneven recovery in private sector investment. Last year’s performance in order flows — 19% versus the company’s expectation of 12-15% — was due to a shift in government tender awards, Group Chief Financial Officer R. Shankar Raman said in an interview.
Of the 14 trillion rupees ($170 billion) of government projects tendered, over 60% were awarded, compared to the usual 35-40%, he said. “This year has different dynamics,” he said.
Interview excerpts:
Analysts expect government spending to step up ahead of state, central elections. Why then have you guided for lower order flow growth in FY24?
In our experience, the election year is never a complete 12-month calendar. We are looking at possibly a 10-month year. Also, government projects that will get announced will be projects which are a little more low hanging in terms of technology, execution, smaller projects, more quick to finish, where we may not exactly be very competitive. Our competitiveness comes from large complex projects, which generally competition does not undertake very easily. Given these dynamics, we thought that it is better to plan for a lower scale and then exceed.
What about an anticipated pick up in India private sector investments and continued momentum in international orders?
Affirmative answer for both. On the international front, Middle East is benefiting from firm oil prices and they continue to invest a fair bit, not only in the traditional oil and gas sector but also in refineries as well as they’re building up big time in renewable energy such as solar investments. New cities are being built and railroad transportation infrastructure is being built. So all of these are actually points of interest for us. Our guess is, FY24 will also have the equal mix of one-third from international markets and two-thirds from India.
In India private sector capital expenditure, we have seen statistically an uptick in FY23. In FY22, nearly 25% of orders in projects and manufacturing segment was from private sector. In FY23 that has moved to 32%. Is it a broad based expansion in private capex? No. I think it is very sector specific. The sectors which got off to an early start are minerals, metals sector, then automobiles, and as real estate started making a return, construction equipment business picked up speed. Data centers, given the evolving regulations around data residency as well as IT services being packed on top to provide cloud services, are beginning to play a fairly decent role (in order flow). It’s very-power intensive activity and that is also being done by the private sector. This apart, some of the concessions around airports, station redevelopment are areas that have been marked out for private sector and these are again opportunities for us to work on.
If I aggregate these diverse sets of private sector investments, slowly it’s beginning to pick up speed. It’ll still be very (industry) specific going forward for a year or two. Investments that have been committed now will take about 12-18 months to actually get commissioned.
WATCH: Larsen & Toubro CFO on India Election, Energy Transition (Video)
What is the potential size of the green opportunity, in terms of new orders?
Private sector has announced big plans in energy transition. My own belief is that it’s very, very early days. People are still trying to figure out technology, cost competitiveness of these solutions. The world going the ESG way means big bucks to be spent, but who’s going to cut those checks, who’s going to bear the cost? All of these are getting debated and the solutions are very, very industry specific.
Low hanging fruit, like revamping equipment to carbon capture better, reduce emissions, we are seeing traction on those being ordered out. But big change, in terms of changing the source of fuel et cetera, will take some more time. Hopefully in 2024-25, we’ll see some signs of that in our order flow.
All these are today small pieces of action. My guess is they will aggregate to 20-30 billion rupees this year and step up to 40-50 billion rupees in the following year.
About your green hydrogen plans, how big is this business likely to become for L&T?
There are two, three pieces to it. We have tied up with Renew Power to provide renewable energy. We are putting up a facility for manufacturing electrolyzers. Initially we will test it in the Indian markets before we start thinking of export. The third part is, somebody has to put up the entire facility in their complex to change the mix of energy that they use for their industrial application. Refineries are the first port of call.
The private sector, Reliance Industries Ltd. for example, has announced big plans, but they will possibly approach it in a different way as compared to the way Indian Oil Corp. has. IOC has several refineries all over the country. They’ve initially taken one or two refineries where they will implement this solution and their plan is to have a take-or-pay agreement. Since it is going to be done in partnership with them as a customer, us as electrolyzer manufacturer cum EPC player and Renew as an energy provider, it’ll be done in some kind of a tripartite way. Over a period of five to seven years, the math is still being worked out, they would pay for this facility transformation, the cost being a little uncertain. If refinery one does well it can get multiplied into the other refineries and we could even take these services overseas.
What are the spaces that excite you the most in terms of potential to catapult your revenue opportunity over the next two, three years?
I think it’ll continue to be around infrastructure because I think India is very, very under-served insofar as infrastructure is concerned. What the government is trying to do is to ensure connectivity. And by ensuring connectivity, they’re solving a bit of the congestion issue around the urban centers, taking employability and prosperity to different parts of the country. I am looking at this as over a 10-, 15-, 20-year period. If you can imagine India and then put a grid of connectivity on it, possibly we will have about 50, 60 hubs or centers, each with their local specialization, then local jobs gets created, prosperity becomes a little more inclusive. And if that has to happen, enormous amount of work needs to be done on the ground.
What India is battling is not only resources but also time. We spend a lot more time than what we ought to in implementing the projects that we conceive. If we can crash the time, the competitiveness of the country goes up. So, we have a lot of work to do in the area of infrastructure.
We’ve spoken of opportunities, what do you see as the biggest challenge besides geopolitics and oil prices?
India needs a lot of skilled workers. Our plans are fine but we need people to execute them. The bidding process is still very price sensitive because it’s L1 (lowest bidder). So we need to manage cost and cash. To manage cost and cash, we need people to embrace technology, use newer methods and get it right the first time. And that would mean having a lot of skill at our disposal. That’s going to be the big challenge as the order book grows. It’s almost 4 trillion rupees right now. As it grows to 5-6 trillion, we need teams to work. We have close to 1,000 projects today. That means 1,000 competent project teams, which are on the ground, executing both in India and overseas. And if this has to become 2,000, it’s a big task. So, resource management is going to be a key challenge.
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